1) Turnaround in petrochem business imminent, LPG robust: GAIL expects petrochem production volumes to improve to ~120kmt in Q1FY17, reaching ~600kmt in FY17 and ~800kmt in FY18, implying higher-than-expected production guidance. Management has been striving to reduce operating costs across businesses, petrochemicals being the major focus. GAIL has appointed consultants that will earn fees based on the quantum of reduction in costs – the first such initiative in the company’s history. The impact of these measures would be visible by end-FY17.
2) Tariff improvement trend to be more structural: GAIL management agreed with our estimate that base pipeline tariffs could improve by ~30% on average post the PNGRB’s tariff reviews (due in FY17). The increase in tariffs would be a structural trend until 2020, as actual returns would continue to trace 12% IRR assured as per PNGRB regulations (as 75% utilisation or ~175msmcmd volumes are unlikely to materialise before FY20). While the court case against PNGRB’s authority to set tariffs continues in the Delhi high court, GAIL has implemented recent pipeline tariff orders (KG basin and Cauvery basin pipelines) under protest.
3) US LNG contracts may not need renegotiation: Management does not see the need to renegotiate its 5.8mmtpa LNG contracts from the US (Sabine Pass & Cove Point). Most of these volumes would be resold in international markets, while some would enter India (~2mmtpa) through swapping arrangements.
Key earnings triggers
- Additional transmission/trading gas volumes from LNG price pooling for the power and fertiliser sectors
- Increase in gas pipeline tariffs
- Decline in domestic gas prices from April 2016 (as per the domestic gas pricing formula),
- leading to an improvement in LPG business earnings
- Improvement in petrochemical business volumes
- Increase in oil prices, leading to higher LPG and PE prices
- Lower-than-expected growth in gas transmission and trading volumes
- Negative margins from higher pricing of US LNG contracts
- A sharp decline in oil prices (to <US$ 30/bbl) ¡V this could impact LPG and petrochemical business earnings